Bullard Favors Tapering QE Pace if Data Stays Strong

St. Louis Federal Reserve Bank President James Bullard told Bloomberg TV's
Michael McKee today that 2013 "is going to be a better year. I am probably
more optimistic than most. I think a lot of the uncertainties that were around
this economy in 2012 have come off the table."

On the Fed's $85 billion per month asset purchase program, Bullard said, "I
do think this idea of tapering is one that I like. If we continue to get signs
of improvement in labor markets we can slow down our pace of purchases."

Courtesy of Bloomberg Television

Bullard on today's jobs report:

"I did not see all of the details of the jobs report but in general I would
say it was a positive report. Unemployment did tick up though. If you look
at those numbers and average over the last three months, at least my ocular
average was 200,000 either on the headline or the private payroll numbers.
So 200,000 per month is a pretty strong pace. Obviously we have had trouble
getting to that level during the recovery. If we could sustain that, that would
be great during 2013."

On what happens to a Fed that wants 6.5% unemployment and unemployment
goes up because more people enter the labor force:

"I am not sure about the story that more people are going to enter the labor
force as the unemployment rate ticks down. I think that is something that happens
at a much lower levels of unemployment than we have right now. You are talking
about people who have been out of the labor force for a while. They basically
made a decision that says that they do not like their options or what is being
offered at their skill level so they are going to do something else--stay at
home, go back to school, retire early or something like that. I am not sure
those people are going to hop right back into the labor force just because
unemployment is somewhere in the 7s. I am projecting unemployment, despite
today's tick up, I think it will continue to tick down through 2013. If you
look at last three years unemployment has ticked down even though growth has
not been strong, so I think that will probably continue in 2013."

On why he voted for a third round of bond buying by the Fed when he's previously
expressed skepticism about it:

"This particular meeting was not a decision to extend the program. It was
a decision to remain where we were. I felt that was probably the right thing
to do at this meeting. I was in agreement with the chairman and the majority
in this case."

On the December meeting showing that there was a lot of debate on how long
the bond buying program would stay in place and whether that continued into
the January meeting:

"Of course the committee continues to discuss all our programs including the
QE program and how we are going to handle it going forward. I think we have
been able to get more agreement on the interest-rate side and probably less
agreement on the balance sheet side. I think it is going to be a collective
judgment of the committee as to when there will be substantial improvement
in labor markets that's sufficient so we can slow down our purchases. We are
going to have to leave it at that. I don't think we have any agreement among
members at this point."

On whether bond buying will slow down or stop by the end of the year:

"It is a state-contingent thing. I think we are going back to see how the
economy progresses during the year. If we do get enough improvement in labor
markets we will have had a good year and we will be in a position to slow down
or stop the purchases. I do think this idea of tapering is one that I like.
If we continue to get signs of improvement in labor markets we can slow down
our pace of purchases. I would not regard that as a tighter policy, I would
regard that as a slower pace of easing policy. I think we can do that and communicate
that in the right way and stay away from the notion that all of a sudden one
day we are going to be buying 85 billion and the next day we are going to buy
0. You don't need to have that kind of a thing."

On whether he's afraid if the Fed does that, everyone in markets will head
for the exits:

"I don't think so because it certainly does not mean that we made any decisions
to sell any assets. It is just that the pace of the purchases would be slower
than otherwise. We could think about that and talk about that, but that is
one way to manage the program going forward. It would be one way to acknowledge
to markets that we see some improvement, but not enough improvement to stop
the easing program altogether."

On what he says to traders who say that the Fed is distorting the markets:

The Fed is certainly part of the market but only part of it. There is an equilibrium
there with the policy we have in place. But that would always be true with
the Fed...It is a bigger program than usual. The economy has been hit by a
bigger shock than usual so that is why the policy is unusual at this time.
I do think it is important to stay away from the very low inflation scenarios
that sometimes grip economies that are in this situation. As you know I have
been concerned about deflation in the past. I am actually not that concerned
about it right now. If you look at the headline PCE inflation measured from
a year ago, 1.3% is a low-ish number. I would have been willing to argue up
to now it is just a matter of noise. But it is low. I don't like the core number
as much."

On whether he has deflationary worries:

"I am not worried about it yet, but these are getting to be low. I think we
have some room to maneuver on the inflation front as a committee because these
numbers have come in lower than expected and we are running below our target
right now."

On the Fed's communication strategy and what investors should think about
2013:

"I will tell you what you should think about 2013. I think it is going to
be a better year. I am probably more optimistic than most. I think a lot of
uncertainties that were around this economy in 2012 have come off the table.
The elections have come off. Some of the fiscal risk in the U.S. has come off.
The European situation has settled down a lot. China is looking like it will
have a better year. Emerging markets will have a better year. Europe went into
recession in 2012. I do not think Europe will go deeper into recession. They
might improve a little in 2013. For all of these reasons I think a lot of the
uncertainty has pulled pack--not all of it, but you still have health care
and other issues out there. A lot of it has come off the table. I think that
is why we are seeing rallies in U.S. equity markets. I also think Fed policy
is quite a bit easier right now than it was six or nine months ago. I think
that outright purchases are a more potent tool than the Twist import. We also
made changes to the way we do the forward guidance that is a definite improvement.
We got rid of that mid 2015 date and put thresholds in place instead. There
are a lot of arguments about that. The good part is you get rid of this pessimistic
signal that we were sending that the economy is going to be bad for another
three years. I think those improvements made monetary policy easier. Both of
those things are just coming online now. We have an easier monetary policy
with less uncertainty facing that U.S. economy."